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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the three months ended September 30, 2022OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to Commission file number 001-35618
LegalZoom.com, Inc.
(Exact name of registrant as specified in its charter)
___________________________________
| | | | | |
Delaware | 95-4752856 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
101 North Brand Boulevard, 11th Floor, Glendale, California 91203
|
(Address of Principal Executive Offices, including Zip code) |
(323) 962-8600
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.001 per share | LZ | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | |
| Large accelerated filer | o | Accelerated filer | o |
Non-accelerated filer | ☒ | Smaller reporting company | o |
| | Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 4, 2022, the registrant had outstanding 192,649,274 shares of common stock, $0.001 par value per share, outstanding.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to statements regarding our future results of operations and financial position, industry and business trends, stock compensation, business strategy, plans, market growth and our objectives for future operations.
The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those factors discussed below under “Summary of Risk Factors” and in Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, as such risk factors may be amended, updated or superseded from time to time by our subsequent filings with the Securities and Exchange Commission, or SEC. The forward-looking statements in this Quarterly Report on Form 10-Q are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.
Summary of Risk Factors
Our business involves significant risks and you are urged to carefully consider the risks discussed under Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q prior to making an investment in us. These risks include, but are not limited to, the following:
•Our recent growth may not be indicative of our future growth and, if we continue to grow, we may not be able to manage our growth effectively.
•Our future quarterly results of operations may fluctuate significantly due to a wide range of factors, which makes our future results difficult to predict.
•We have a history of net losses, we anticipate increasing expenses in the future, and we may not be able to maintain profitability.
•If we fail to provide high-quality services, customer care and customer experience and add new services that meet our customers’ expectations, we may not be able to attract and retain customers.
•If we do not continue to innovate and provide a platform that is useful to our customers, we may not remain competitive, and our results of operations could suffer.
•Our business primarily depends on business formations and fluctuations or declines in the number of business formations may adversely affect our business.
•Our subscription services are highly dependent upon our transaction products, and if we are unable to maintain or attract subscribers, or convert our transactional customers to subscribers, our business, results of operations, financial condition and future prospects may be adversely affected.
•Our business depends substantially on our subscribers renewing their subscriptions with us and expanding their use of our platform, but we cannot accurately predict renewal or expansion rates.
•Our business depends on our ability to drive additional purchases and cross-sell to paying customers and our business, results of operations, financial condition or future prospects may be harmed if we are not successful.
•The legal solutions market is highly competitive and our failure to compete successfully could materially and adversely affect our business, results of operations, financial condition and future prospects.
•Our business depends on our brand and reputation, which could be adversely affected by numerous factors.
•If our marketing efforts are unsuccessful, our ability to attract new customers or retain existing customers may be adversely affected, which may adversely affect our business, results of operations, financial condition and future prospects.
•We depend on top talent, including our senior management team, to grow and operate our business, and if we are unable to hire, retain or motivate our employees, including as a result of our remote-first workforce policy, we may not be able to grow or operate effectively, which may adversely affect our business and future prospects.
•Our business and success depend in part on our strategic relationships with third parties, including our partner ecosystem, and our business would be harmed if we fail to maintain or expand these relationships.
•We have identified material weaknesses in our internal control over financial reporting and, if we fail to remediate these material weaknesses, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence and the price of our common stock.
•Our business and services subject us to complex and evolving U.S. and foreign laws and regulations regarding the unauthorized practice of law, legal document processing, legal plans, tax preparation and other related matters, and any failure or perceived failure by us to comply with applicable laws and regulations may subject us to regulatory inquiries, claims, suits, and prosecutions, as well as changes in our service offerings, potential liabilities, or additional costs.
Note Regarding Third-Party Information
This Quarterly Report on Form 10-Q includes market data and certain other statistical information and estimates that are based on reports and other publications from industry analysts, market research firms, and other independent sources, as well as management's own good faith estimates and analyses. We believe these third-party reports to be reputable, but have not independently verified the underlying data sources, methodologies, or assumptions. The reports and other publications referenced are generally available to the public and were not commissioned by LegalZoom.com, Inc. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information.
TABLE OF CONTENTS
Part I
Item 1. Condensed Consolidated Financial Statements (Unaudited)
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except par values)
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 211,812 | | | $ | 239,297 | |
Accounts receivable, net | 13,578 | | | 10,635 | |
Prepaid expenses and other current assets | 16,624 | | | 16,589 | |
| Current assets held for sale | 22,722 | | | — | |
Total current assets | 264,736 | | | 266,521 | |
Property and equipment, net | 29,012 | | | 47,013 | |
Goodwill | 63,184 | | | 59,910 | |
Intangible assets, net | 13,552 | | | 16,031 | |
| Operating lease right-of-use assets | 11,796 | | | — | |
Deferred income taxes | 27,473 | | | 27,653 | |
Available-for-sale debt securities | 1,183 | | | 1,122 | |
Other assets | 12,877 | | | 12,765 | |
Total assets | $ | 423,813 | | | $ | 431,015 | |
Liabilities and stockholders’ equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 25,805 | | | $ | 31,788 | |
Accrued expenses and other current liabilities | 59,916 | | | 50,817 | |
Deferred revenue | 168,705 | | | 146,364 | |
| Operating lease liabilities | 2,054 | | | — | |
Total current liabilities | 256,480 | | | 228,969 | |
Operating lease liabilities, non-current | 9,568 | | | — | |
Deferred revenue | 1,013 | | | 1,554 | |
Other liabilities | 2,926 | | | 2,941 | |
Total liabilities | 269,987 | | | 233,464 | |
Commitments and contingencies (Note 8) | | | |
Stockholders’ equity: | | | |
Preferred stock, $0.001 par value; 100,000 shares authorized at September 30, 2022, none issued or outstanding at September 30, 2022 and December 31, 2021 | — | | | — | |
Common stock, $0.001 par value; 1,000,000 shares authorized; 193,848 shares and 198,084 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 193 | | | 198 | |
Additional paid-in capital | 1,015,068 | | | 947,160 | |
Accumulated deficit | (865,933) | | | (748,012) | |
Accumulated other comprehensive income (loss) | 4,498 | | | (1,795) | |
Total stockholders’ equity | 153,826 | | | 197,551 | |
Total liabilities and stockholders’ equity | $ | 423,813 | | | $ | 431,015 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | | $ | 154,416 | | | $ | 147,879 | | | $ | 472,492 | | | $ | 432,943 | |
| Cost of revenue | | 50,050 | | | 47,267 | | | 163,383 | | | 141,086 | |
| Gross profit | | 104,366 | | | 100,612 | | | 309,109 | | | 291,857 | |
| Operating expenses: | | | | | | | | |
| Sales and marketing | | 66,145 | | | 72,572 | | | 215,964 | | | 209,364 | |
| Technology and development | | 17,457 | | | 26,865 | | | 51,613 | | | 65,790 | |
| General and administrative | | 30,103 | | | 28,192 | | | 88,560 | | | 75,202 | |
| Impairment of long-lived and other assets | | 237 | | | 493 | | | 237 | | | 872 | |
| Total operating expenses | | 113,942 | | | 128,122 | | | 356,374 | | | 351,228 | |
| Loss from operations | | (9,576) | | | (27,510) | | | (47,265) | | | (59,371) | |
| Interest income (expense), net | | 535 | | | (9,957) | | | 511 | | | (27,923) | |
| Other (expense) income, net | | (2,536) | | | (368) | | | (6,102) | | | 300 | |
| Loss on debt extinguishment | | — | | | (7,748) | | | — | | | (7,748) | |
| Loss before income taxes | | (11,577) | | | (45,583) | | | (52,856) | | | (94,742) | |
| (Benefit from) provision for income taxes | | (1,469) | | | (5,908) | | | 1,040 | | | (6,849) | |
| Net loss | | $ | (10,108) | | | $ | (39,675) | | | $ | (53,896) | | | $ | (87,893) | |
| Net loss per share attributable to common stockholders—basic and diluted: | | (0.05) | | | (0.20) | | | (0.27) | | | (0.59) | |
| Weighted-average shares used to compute net loss per share attributable to common stockholders—basic and diluted: | | 194,906 | | 196,351 | | 196,984 | | 149,207 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Net loss | | $ | (10,108) | | | $ | (39,675) | | | $ | (53,896) | | | $ | (87,893) | |
| Other comprehensive income, net of tax: | | | | | | | | |
| Change in foreign currency translation adjustments | | 2,644 | | | 1,452 | | | 6,255 | | | 1,101 | |
| Change in available-for-sale debt securities due to unrealized gains | | — | | | 72 | | | 38 | | | 44 | |
| Change in unrealized gain on cash flow hedges: | | | | | | | | |
| Unrealized (loss) gain on interest rate cap and swaps | | — | | | (903) | | | — | | | 1,448 | |
| Reclassification of prior hedge effectiveness and losses from interest rate cap and swaps to net loss | | — | | | — | | | — | | | 2,315 | |
| Reclassification to net loss upon discontinuance of interest rate swaps and prior hedge effectiveness | | — | | | 7,295 | | | — | | | 7,295 | |
| Total net changes in cash flow hedges | | — | | | 6,392 | | | — | | | 11,058 | |
| Total other comprehensive income | | 2,644 | | 7,916 | | 6,293 | | 12,203 |
| Total comprehensive loss | | $ | (7,464) | | | $ | (31,759) | | | $ | (47,603) | | | $ | (75,690) | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
(Loss) Income | | Total
Stockholders’
Equity |
| | | Shares | | Amount | | | | |
| Balance at December 31, 2021 | | 198,084 | | | $ | 198 | | | $ | 947,160 | | | $ | (748,012) | | | $ | (1,795) | | | $ | 197,551 | |
| Issuance of common stock upon exercise of stock options | | 202 | | | — | | | 225 | | | — | | | — | | | 225 | |
| Issuance of common stock upon vesting of restricted stock awards | | 392 | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation | | — | | | — | | | 22,346 | | | — | | | — | | | 22,346 | |
| Repurchased common stock | | (79) | | | — | | | — | | | (1,102) | | | — | | | (1,102) | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | 1,440 | | | 1,440 | |
| Net loss | | — | | | — | | | — | | | (30,609) | | | — | | | (30,609) | |
| Balance at March 31, 2022 | | 198,599 | | | $ | 198 | | | $ | 969,731 | | | $ | (779,723) | | | $ | (355) | | | $ | 189,851 | |
| Issuance of common stock upon exercise of stock options and ESPP | | 174 | | — | | 1,262 | | — | | — | | 1,262 |
| Issuance of common stock upon vesting of restricted stock awards | | 268 | | 1 | | (1) | | — | | — | | — | |
| Shares surrendered for settlement of minimum statutory tax withholdings | | (1) | | — | | (30) | | — | | — | | (30) |
| Stock-based compensation | | — | | — | | 23,596 | | — | | — | | 23,596 |
| Repurchased common stock | | (2,961) | | (3) | | — | | (38,050) | | — | | (38,053) |
| Other comprehensive income | | — | | — | | — | | — | | 2,209 | | 2,209 |
| Net loss | | — | | — | | — | | (13,179) | | — | | (13,179) |
| Balance at June 30, 2022 | | 196,079 | | | $ | 196 | | | $ | 994,558 | | | $ | (830,952) | | | $ | 1,854 | | | $ | 165,656 | |
| Issuance of common stock upon exercise of stock options and ESPP | | 46 | | | — | | | 195 | | | — | | | — | | | 195 | |
| Issuance of common stock upon vesting of restricted stock awards | | 350 | | | — | | | — | | | — | | | — | | | — | |
| Shares surrendered for settlement of minimum statutory tax withholdings | | (2) | | | — | | | (11) | | | — | | | — | | | (11) | |
| Stock-based compensation | | — | | | — | | | 20,326 | | | — | | | — | | | 20,326 | |
| Repurchased common stock | | (2,625) | | | (3) | | | — | | | (24,873) | | | — | | | (24,876) | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | 2,644 | | | 2,644 | |
| Net loss | | — | | | — | | | — | | | (10,108) | | | — | | | (10,108) | |
| Balance at September 30, 2022 | | 193,848 | | | $ | 193 | | | $ | 1,015,068 | | | $ | (865,933) | | | $ | 4,498 | | | $ | 153,826 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)(continued)
(In thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Series A Redeemable
Convertible Preferred
Stock | | | Common Stock | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Loss | | Total
Stockholders’ (Deficit) Equity |
| | Shares | | Amount | | | Shares | | Amount | | | | |
| Balance at December 31, 2020 | 23,081 | | | $ | 70,906 | | | | 125,037 | | | $ | 126 | | | $ | 102,417 | | | $ | (639,348) | | | $ | (13,827) | | | $ | (550,632) | |
| Issuance of common stock upon exercise of stock options | — | | | — | | | | 244 | | | — | | | 151 | | | — | | | — | | | 151 | |
| Issuance of common stock upon vesting of restricted stock awards | — | | | — | | | | 27 | | | — | | | — | | | — | | | — | | | — | |
| Shares surrendered for settlement of minimum statutory tax withholdings | — | | | — | | | | (9) | | | — | | | (100) | | | — | | | — | | | (100) | |
| Stock-based compensation | — | | | — | | | | — | | | — | | | 3,799 | | | — | | | — | | | 3,799 | |
| Net issuance and repayments of full recourse notes receivable | — | | | — | | | | — | | | — | | | 44 | | | — | | | — | | | 44 | |
| Special dividends | — | | | — | | | | — | | | — | | | (23) | | | — | | | — | | | (23) | |
| Other comprehensive income | — | | | — | | | | — | | | — | | | — | | | — | | | 2,964 | | | 2,964 | |
| Net loss | — | | | — | | | | — | | | — | | | — | | | (9,823) | | | — | | | (9,823) | |
| Balance at March 31, 2021 | 23,081 | | | $ | 70,906 | | | | 125,299 | | | $ | 126 | | | $ | 106,288 | | | $ | (649,171) | | | $ | (10,863) | | | $ | (553,620) | |
| Issuance of common stock upon exercise of stock options | — | | | — | | | | 213 | | | — | | | 136 | | | — | | | — | | | 136 | |
| Issuance of common stock upon vesting of restricted stock awards | — | | | — | | | | 32 | | | — | | | — | | | — | | | — | | | — | |
| Shares surrendered for settlement of minimum statutory tax withholdings | — | | | — | | | | (6) | | | — | | | (109) | | | — | | | — | | | (109) | |
| Stock-based compensation | — | | | — | | | | — | | | — | | | 44,810 | | | — | | | — | | | 44,810 | |
| Special dividends | — | | | — | | | | — | | | — | | | (16) | | | — | | | — | | | (16) | |
| Other comprehensive income | — | | | — | | | | — | | | — | | | — | | | — | | | 1,323 | | | 1,323 | |
| Net loss | — | | | — | | | | — | | | — | | | — | | | (38,395) | | | — | | | (38,395) | |
| Balance at June 30, 2021 | 23,081 | | | $ | 70,906 | | | | 125,538 | | | $ | 126 | | | $ | 151,109 | | | $ | (687,566) | | | $ | (9,540) | | | $ | (545,871) | |
| Issuance of common stock upon exercise of stock options | — | | | — | | | | 82 | | | — | | | 93 | | | — | | | — | | | 93 | |
| Issuance of common stock upon vesting of restricted stock awards | — | | | — | | | | 112 | | | — | | | — | | | — | | | — | | | — | |
| Shares surrendered for settlement of minimum statutory tax withholdings | — | | | — | | | | (49) | | | — | | | (1,669) | | | — | | | — | | | (1,669) | |
| Stock-based compensation | — | | | — | | | | — | | | — | | | 38,150 | | | — | | | — | | | 38,150 | |
| Conversion of redeemable convertible preferred stock to common stock in connection with initial public offering | (23,081) | | | (70,906) | | | | 46,162 | | | 46 | | | 70,859 | | | — | | | — | | | 70,905 | |
| Issuance of common stock in connection with initial public offering, net of underwriting discounts and commissions | — | | | — | | | | 21,989 | | | 22 | | | 581,811 | | | — | | | — | | | 581,833 | |
| Private placement of common stock, net of underwriting discounts and commissions | — | | | — | | | | 3,214 | | | 3 | | | 85,047 | | | — | | | — | | | 85,050 | |
| Deferred offering costs | — | | | — | | | | — | | | — | | | (5,636) | | | — | | | — | | | (5,636) | |
| Special dividends | — | | | — | | | | — | | | — | | | (52) | | | — | | | — | | | (52) | |
| Other comprehensive income | — | | | — | | | | — | | | — | | | — | | | — | | | 7,916 | | | 7,916 | |
| Net loss | — | | | — | | | | — | | | — | | | — | | | (39,675) | | | — | | | (39,675) | |
| Balance at September 30, 2021 | — | | | $ | — | | | | 197,048 | | | $ | 197 | | | $ | 919,712 | | | $ | (727,241) | | | $ | (1,624) | | | $ | 191,044 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Cash flows from operating activities | | | |
| Net loss | $ | (53,896) | | | $ | (87,893) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
| Depreciation and amortization | 16,187 | | | 11,604 | |
| Amortization of right-of-use assets | 1,290 | | | — | |
| Amortization of debt issuance costs | 170 | | | 1,335 | |
| Amortization of prior hedge effectiveness | — | | | 3,095 | |
| Impairment of other equity securities | 170 | | | — | |
| Impairment of long-lived assets | 237 | | | 872 | |
| Loss on debt extinguishment | — | | | 7,955 | |
| Discontinuance of interest rate swaps and write-off of prior hedge effectiveness | — | | | 8,688 | |
| Stock-based compensation | 64,490 | | | 86,725 | |
| Deferred income taxes | 166 | | | (7,218) | |
| Change in fair value of financial guarantee | — | | | (150) | |
| Change in fair value of derivative instruments | — | | | 392 | |
| Change in fair value of other equity security | — | | | (1,031) | |
| Change in fair value of contingent consideration | (150) | | | — | |
| Unrealized foreign exchange loss | 5,958 | | | 1,002 | |
| Other | (1) | | | 4 | |
| Changes in operating assets and liabilities, net of effects of business combination: | | | |
| Accounts receivable | (2,902) | | | (3,040) | |
| Prepaid expenses and other current assets | (560) | | | (5,562) | |
| Other assets | (864) | | | (2,283) | |
| Accounts payable | (6,417) | | | 14,635 | |
| Accrued expenses and other liabilities | 7,606 | | | 7,416 | |
| Operating lease liabilities | (1,599) | | | — | |
| Income tax payable | 22 | | | (368) | |
| Deferred revenue | 22,108 | | | 23,978 | |
| Net cash provided by operating activities | 52,015 | | | 60,156 | |
| Cash flows from investing activities | | | |
| Acquisition, net of cash acquired | (2,532) | | | — | |
| Proceeds from acquisition working capital adjustment | 307 | | | — | |
| Purchase of property and equipment | (16,441) | | | (8,500) | |
| Payment upon extinguishment of interest rate swaps | — | | | (3,283) | |
| Net cash used in investing activities | (18,666) | | | (11,783) | |
| Cash flows from financing activities | | | |
| Repayment of capital lease obligations | — | | | (24) | |
| Payment of debt issuance costs | — | | | (767) | |
| Repayment of 2018 Term Loan | — | | | (524,300) | |
| Repayment of hybrid debt | — | | | (1,332) | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
9
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows (continued)
(In thousands)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Payment upon extinguishment of hybrid debt | — | | | (9,774) | |
| Payment of contingent consideration | (600) | | | (1,049) | |
| Payment of special dividends | — | | | (115) | |
| Proceeds from issuance of common stock in initial public offering, net of underwriting discounts and commissions | — | | | 581,833 | |
| Proceeds from private placement, net of underwriting discounts and commissions | — | | | 85,050 | |
| Payment of stock issuance costs | — | | | (5,634) | |
| Repurchase of common stock | (61,736) | | | (1,462) | |
| Shares surrendered for settlement of minimum statutory tax withholding | (41) | | | — | |
| Proceeds from issuance of stock under employee stock plans | 1,682 | | | 412 | |
| Net cash (used in) provided by financing activities | (60,695) | | | 122,838 | |
| Effect of exchange rate changes on cash and cash equivalents | (139) | | | 23 | |
| Net (decrease) increase in cash and cash equivalents, and restricted cash equivalents | (27,485) | | | 171,234 | |
| Cash and cash equivalents, and restricted cash equivalents, at beginning of the period | 239,297 | | | 139,470 | |
| Cash and cash equivalents at end of the period | $ | 211,812 | | | $ | 310,704 | |
| | | |
| Non-cash investing and financing activities: | | | |
| Conversion of Series A redeemable convertible preferred stock into common stock in connection with initial public offering | — | | | 70,906 | |
| Purchase of property and equipment included in accounts payable and accrued expenses and other current liabilities | 1,124 | | | 486 | |
| Change in fair value of hedged interest rate swaps and interest rate cap | — | | | (5,817) | |
| Capitalized stock-based compensation | 1,779 | | | 35 | |
| Right-of-use assets under operating leases | 13,165 | | | — | |
| Contingent consideration for acquired business | 850 | | | — | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
LegalZoom.com, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Description of the Business
LegalZoom.com, Inc, was initially formed as a California corporation in 1999 and reincorporated as a Delaware corporation in 2007. LegalZoom.com, Inc., and its wholly owned subsidiaries, referred to herein as “we,” “us,” or “our,” has its executive headquarters in Glendale, California, its operational headquarters in Austin, Texas and additional locations in Frisco and San Antonio, Texas, Beaverton, Oregon and London in the United Kingdom, or U.K. We are a provider of services that meet the legal needs of small businesses and consumers. Our position at business inception allows us to become a trusted business advisor, supporting the evolving needs of a new business across its lifecycle. Along with formation, our offerings include ongoing compliance and tax advice and filings, trademark filings, and estate plans. Additionally, we have insights into our customers and leverage our offerings as a channel to introduce small businesses to leading brands in our partner ecosystem, solving even more of their business needs.
Initial Public Offering
The registration statement related to our initial public offering, or IPO, was declared effective on June 29, 2021, and our common stock began trading on the Nasdaq Global Select Market on June 30, 2021. On July 2, 2021, we completed our IPO for the sale of 19,121,000 shares of our common stock, $0.001 par value per share at an offering price of $28.00 per share, for proceeds of $505.9 million, net of underwriting discounts and commissions. In addition, we sold 2,868,150 shares of our common stock for net proceeds of $75.9 million pursuant to the full exercise of the underwriter’s option to purchase additional shares in connection with the IPO. In addition, on July 2, 2021, we sold 3,214,285 shares of our common stock in a private placement with an existing related party stockholder for proceeds of $85.0 million, net of underwriting discounts and commissions. We raised aggregate proceeds of $666.9 million from our IPO and private placement after deducting underwriting discounts and commissions. We incurred stock issuance costs of $5.6 million. Proceeds raised from our IPO were used to repay the full outstanding balance of $521.6 million on our prior 2018 term loan, or 2018 Term Loan.
Upon the completion of our IPO, 23,081,080 outstanding shares of redeemable convertible preferred stock with a carrying value of $70.9 million converted into 46,162,160 shares of common stock. Following the completion of the IPO, we have one class of authorized and outstanding common stock. Immediately upon the completion of our IPO, we filed an Amended and Restated Certificate of Incorporation, which authorized a total of 1,000,000,000 shares of common stock, $0.001 par value per share and 100,000,000 shares of preferred stock, par value $0.001 per share.
Note 2. Summary of Significant Accounting Policies
A summary of the significant accounting policies we follow in the preparation of the accompanying unaudited condensed consolidated financial statements is set forth below.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the related notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2021. The December 31, 2021 unaudited condensed consolidated balance sheet was derived from our audited consolidated financial statements as of that date. Our unaudited condensed consolidated financial statements include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of the unaudited condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. There have been no significant changes in accounting policies during the three and nine months ended September 30, 2022 from those disclosed in the annual consolidated financial statements for the year ended December 31, 2021 and the related notes, except as noted below in the Recently Adopted Accounting Pronouncements.
The operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results expected for the full year ending December 31, 2022.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, among other things, revenue recognition, sales allowances and credit reserves, available-for-sale debt securities, valuation of long-lived
assets and goodwill, income taxes, commitments and contingencies, valuation of assets and liabilities acquired in business combinations and stock-based compensation. Actual results could differ materially from those estimates.
The extent to which COVID-19 continues to impact our business and financial results will depend on numerous continuously evolving factors including, but not limited to, the magnitude and duration of COVID-19, including resurgences; the impact on our employees; the extent to which it will impact worldwide macroeconomic conditions, including interest rates, employment rates, and health insurance coverage; the speed and degree of the anticipated recovery, as well as variability in such recovery across different geographies, industries, and markets; and governmental and business reactions to the pandemic. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of September 30, 2022 and through the date of the issuance of these unaudited condensed consolidated financial statements. The accounting matters assessed included, but were not limited to, the carrying value of goodwill and other long-lived assets. While there was not a material impact as a result of COVID-19 on our unaudited condensed consolidated financial statements at and for the three and nine months ended September 30, 2022, our future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to our consolidated financial statements in future reporting periods.
Significant accounting policies
Significant accounting policies are detailed in "Note 2: Summary of Significant Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2021. On January 1, 2022, we adopted Financial Accounting Standards Board, or FASB, Accounting Standard Codification No. 842, Leases, or ASC 842, with application to leases that existed as of the adoption date.
Segment and Geographic Information
Our Chief Executive Officer, as the Chief Operating Decision Maker, organizes our company, manages resource allocations, and measures performance on the basis of one operating segment.
Revenue outside of the U.S., based on the location of the customer, represented less than 1% of our unaudited consolidated revenue for each of the three and nine months ended September 30, 2022 and 2021. Our property and equipment located outside of the U.S. was less than 1% of our consolidated property and equipment as of September 30, 2022 and December 31, 2021.
Foreign Currency
The British Pound Sterling is the functional currency for our foreign subsidiaries. The financial statements of these foreign subsidiaries are translated to U.S. Dollars using period-end rates of exchange for assets and liabilities, historical rates of exchange for equity, and average rates of exchange for the period for revenue and expenses. Translation gains and losses are recorded in accumulated other comprehensive income (loss) as a component of our unaudited consolidated statements of redeemable convertible preferred stock and stockholders’ equity (deficit). We recognized foreign currency transaction losses of $2.6 million and $1.4 million during the three months ended September 30, 2022 and 2021, respectively, and losses of $6.0 million and $1.0 million during the nine months ended September 30, 2022 and 2021, respectively.
Concentrations of Credit Risk
We maintain accounts in U.S. and U.K. banks with funds insured by the Federal Deposit Insurance Corporation, or FDIC, and the Financial Services Compensation Scheme, or FSCS, respectively. Our bank accounts may, at times, exceed the FDIC and FSCS insured limits. Financial instruments that potentially subject us to credit risk consist principally of cash and cash equivalents. Management believes that we are not exposed to any significant credit risk related to our cash or cash equivalents and have not experienced any losses in such accounts.
Due to a large and diverse customer base, no individual customer represented more than 1% of total revenue for the three and nine months ended September 30, 2022 and 2021. At September 30, 2022 and December 31, 2021, there were no customers with an outstanding balance of 10% or more of our accounts receivable balance.
Held for sale
We classify long-lived assets or asset groups we plan to sell as held for sale on our consolidated balance sheets only after certain criteria have been met including: (i) management has the authority and commits to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and the plan to sell the asset have been initiated, (iv) the sale of the asset is probable within 12 months, (v) the asset is being actively marketed at a reasonable sales price relative to its current fair value, and (vi) it is unlikely that the plan
to sell will be withdrawn or that significant changes to the plan will be made. We record assets or asset groups held for sale at the lower of their carrying value or fair value less costs to sell.
Leases
Financial information related to periods prior to adoption will be as originally reported under ASC No. 840, Leases. On January 1, 2022, we recorded operating lease right-of-use, or ROU assets of $5.7 million and operating lease liabilities of $5.9 million. The difference between the leased assets and lease liabilities represents the existing deferred rent liabilities balance at adoption, resulting from historical straight-line recognition of operating leases, which was reclassified upon adoption to reduce the measurement of the leased assets. The adoption of the standard did not have a material impact on our stockholders’ equity, results of operations, or cash flows.
The new standard provides several optional practical expedients in transition. We elected the package of practical expedients permitted under the transition guidance, which eliminates the requirement to reassess whether a contract contains a lease and lease classification.
We have also made accounting policy elections, including a short-term lease exception policy, permitting us to not apply the recognition requirements of this standard to short-term leases, which are leases with expected terms of 12 months or less, and an accounting policy to account for lease and certain non-lease components as a single component for certain classes of assets. Additionally, we used the portfolio approach when applying the discount rate selected based on the dollar amount and term of the obligation.
We determined whether an arrangement is a lease, or contains a lease, at inception if we are able to identify an asset and can conclude we have the right to control the identified asset for a period of time. Leases are included in operating lease ROU assets and operating lease liabilities in the accompanying unaudited condensed consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet.
ROU assets represent our right to control an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use the incremental borrowing rate based on the information available at commencement date in determining the discount rate used to present value lease payments. We used the incremental borrowing rate on January 1, 2022 for operating leases that commenced on or prior to that date. The incremental borrowing rate used is estimated based on what we would be required to pay for a collateralized loan over a similar term. Our leases typically do not include any residual value guarantees, bargain purchase options, or asset retirement obligations.
Our lease terms are only for periods in which we have enforceable rights. A lease is no longer enforceable when both the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty. Our lease terms are impacted by options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We generally use the base, non-cancelable lease term when determining the lease assets and liabilities.
Our agreements may contain variable lease payments. We include variable lease payments that depend on an index or a rate and exclude those which depend on facts or circumstances occurring after the commencement date, other than the passage of time.
Revenue Recognition
We derive our revenue from the following sources:
Transaction revenue—Transaction revenue is primarily generated from our customized legal document services upon fulfillment of these services. Transaction revenue includes filing fees and is net of cancellations, promotional discounts and sales allowances.
Subscription revenue—Subscription revenue is generated primarily from subscriptions to our registered agent services, compliance packages, attorney advice, and legal forms services, in addition to software-as-a-service, or SaaS, subscriptions in the U.K. We generally recognize revenue from our subscriptions ratably over the subscription term. Subscription terms generally range from thirty days to one year. Subscription revenue includes the value allocated to bundled free-trials for our subscription services and is net of promotional discounts, cancellations, sales allowances and credit reserves and payments to third-party service providers such as legal plan law firms and tax service providers.
Partner revenue—Partner revenue consists primarily of one-time or recurring fees earned from third-party providers from leads generated to such providers through our online legal platform. Revenue is recognized when the related performance-based criteria have been met. We assess whether performance criteria have been met on a cost-per-click or cost-per-action basis.
Revenue from our transaction, subscription and partner revenue is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Transaction | | $ | 57,550 | | | $ | 66,873 | | | $ | 188,166 | | | $ | 201,621 | |
Subscription | | 91,397 | | | 73,317 | | | 267,069 | | | 208,194 | |
Partner | | 5,469 | | | 7,689 | | | 17,257 | | | 23,128 | |
Total revenue | | $ | 154,416 | | | $ | 147,879 | | | $ | 472,492 | | | $ | 432,943 | |
Recent Accounting Pronouncements
Under the Jumpstart our Business Startups Act, or JOBS Act, we currently meet the definition of an emerging growth company. We have elected to use the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies. To the extent that we no longer qualify as an emerging growth company, which we expect to occur on December 31, 2022, we will be required to adopt certain accounting pronouncements earlier than the adoption dates disclosed below which are for non-public business entities.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We adopted this guidance effective January 1, 2022. Refer to Note 8 for further details.
In March 2020, the FASB issued Accounting Standards Update, or ASU No. 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting, or Topic 848, that provides optional relief to applying reference rate reform to contracts, hedging relationships, and other transactions that reference the LIBOR, which has been discontinued as of the end of 2021. Also, in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848) — Scope, to clarify that cash flow hedges are eligible for certain optional expedients and exceptions for the application of subsequent assessment methods to assume perfect effectiveness as previously presented in ASU 2020-04. Topic 848 is effective immediately and may be applied through December 31, 2022. We have adopted the provisions of Topic 848 and the adoption did not have a material impact to our unaudited condensed consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit losses: Measurement of Credit Losses on Financial Instruments (Topic 326), or Topic 326, which revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, available-for-sale debt securities and accounts receivable. Based upon our current filing status, Topic 326 is effective for our annual reporting period beginning on January 1, 2023. We are currently evaluating the impact of the adoption of Topic 326 on our consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. Based upon our current filing status, the amendments are effective for the reporting period beginning on January 1, 2023, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption on our consolidated financial statements.
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement—Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (Topic 820), or Topic 820, which clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. Based upon our current filing status, the amendments are effective for fiscal years, beginning after December 15, 2023. We are currently evaluating the impact of the adoption on our consolidated financial statements.
Note 3. Other Financial Statement Information
Accounts Receivable
Changes in the allowance consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Beginning balance | | $ | 4,508 | | | $ | 5,114 | | | $ | 4,060 | | | $ | 5,256 | |
| Add: amounts recognized as a reduction of revenue | | 2,099 | | | 1,884 | | | 6,292 | | | 4,911 | |
| Add: bad debt expense recognized in general and administrative expense | | 2 | | | 146 | | | 142 | | | 177 | |
| Less: write-offs, net of recoveries | | (2,190) | | | (2,415) | | | (6,075) | | | (5,615) | |
| Ending balance | | $ | 4,419 | | | $ | 4,729 | | | $ | 4,419 | | | $ | 4,729 | |
The allowance recognized as a reduction of revenue primarily relates to our installment plan receivables for which we expect we will not be entitled to a portion of the transaction price based on our historical experience with similar transactions. The allowance recognized against general and administrative expense represents an allowance relating to receivables from partners that are no longer considered collectible.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Prepaid expenses | $ | 11,377 | | | $ | 10,968 | |
| Deferred cost of revenue | 2,029 | | | 1,819 | |
| Capitalized cloud computing development costs | 1,016 | | | 867 | |
| Other current assets | 2,202 | | | 2,935 | |
| Total prepaid expenses and other current assets | $ | 16,624 | | | $ | 16,589 | |
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Accrued payroll and related expenses | $ | 21,574 | | | $ | 21,858 | |
| Accrued vendor payables | 16,557 | | | 18,239 |
| Accrued advertising | 8,543 | | | 426 |
| Sales allowances | 4,287 | | | 4,862 |
| Accrued sales, use and business taxes | 3,745 | | | 2,678 |
| Other | 5,210 | | | 2,754 |
| Total accrued expenses and other current liabilities | $ | 59,916 | | | $ | 50,817 | |
Depreciation and Amortization
Depreciation and amortization expense of our property and equipment, including capitalized internal-use software, and intangible assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Cost of revenue | | $ | 1,966 | | | $ | 1,403 | | | $ | 6,220 | | | $ | 4,479 | |
| Sales and marketing | | 1,754 | | | 1,401 | | | 5,508 | | | 4,199 | |
| Technology and development | | 694 | | | 538 | | | 2,112 | | | 1,709 | |
| General and administrative | | 840 | | | 433 | | | 2,347 | | | 1,217 | |
| Total depreciation and amortization expense | | $ | 5,254 | | | $ | 3,775 | | | $ | 16,187 | | | $ | 11,604 | |
Deferred revenue
Deferred revenue as of September 30, 2022 and December 31, 2021 was $169.7 million and $147.9 million, respectively. Revenue recognized in the three months ended September 30, 2022 and 2021 that was included in deferred revenue as of June 30, 2022 and 2021 was $81.7 million and $79.4 million, respectively. Revenue recognized in the nine months ended September 30, 2022 and 2021, that was included in deferred revenue as of December 31, 2021 and 2020 was $146.5 million and $121.9 million, respectively.
We have omitted disclosure on the transaction price allocated to remaining performance obligations and estimated timing of revenue recognition as our contracts with customers that have a duration of more than one year are immaterial.
Note 4. Assets Held for Sale
During the three months ended September 30, 2022, following an evaluation of our office space and business requirements, we commenced a plan to sell our operational headquarters in Austin, Texas, consisting of land, a building and building improvements, and determined that these assets met the held for sale criteria. We ceased recording depreciation on these assets upon meeting the held for sale criteria. At September 30, 2022, the total carrying value of the assets held for sale were $22.7 million. The estimated fair value less costs to sell the assets held for sale exceed their carrying values and hence no impairment was necessary during the quarter ended September 30, 2022.
Note 5. Acquisitions
United Agent Services Corp
In August 2022, we acquired certain assets and liabilities of United Agency Services Corp, or UA Services, a company providing registered agent services and corporate compliance solutions for $3.5 million, of which $2.6 million was paid in cash on the acquisition date and up to $1.0 million will be paid in cash within twelve months, based upon the achievement of certain earnout metrics. Furthermore, up to $0.4 million is contingent on certain service conditions being met. This amount has been excluded from the purchase consideration and will be recorded as future compensation expense.
The acquisition was completed in order to build a more durable registered agency platform and has been accounted for as a business combination. The preliminary purchase price was allocated to the assets acquired and liabilities assumed. Goodwill of $3.3 million arising from the acquisition consisted largely of the assembled workforce and synergies expected from combining our operations. The acquired goodwill is expected to be deductible for tax purposes. There were no intangible assets acquired in connection with this acquisition. Acquisition costs related to this transaction of approximately $0.4 million were expensed as incurred and are included in general and administrative expenses on the accompanying unaudited condensed consolidated statements of operations.
The revenue and earnings of the acquired business have been included in our results of operations since the acquisition date and are not material to the consolidated financial results. Pro forma revenues and results of operations for this acquisition have not been presented as the impact on our unaudited condensed consolidated financial statements is immaterial.
The purchase accounting for this acquisition remains incomplete with respect to acquired contingent liabilities as management continues to gather and evaluate information about circumstances that existed as of the acquisition
date. Measurement period adjustments will be recognized in the reporting period in which the adjustment amounts are determined within 12 months from the acquisition date.
Earth Class Mail, Inc.
In November 2021, we acquired all of the outstanding equity interests in Earth Class Mail, Inc., or Earth Class Mail, a company that provides virtual mailbox solutions for small businesses, in line with our strategy to scale our existing business through building in-house adjacencies. The total cash paid was $61.2 million, inclusive of a working capital adjustment of $0.3 million. Intangible assets acquired from Earth Class Mail included customer relationships of $10.6 million, developed technology of $5.4 million and trade names of $0.2 million, which are being amortized over their estimated useful life using the straight-line method. Goodwill of $48.6 million arising from the acquisition consisted largely of the assembled workforce and synergies expected from combining Earth Class Mail into our operations.
There were no material measurement period adjustments recorded to the fair values of assets acquired and liabilities assumed during the period and the purchase price is considered final.
Note 6. Long-term Debt
On July 2, 2021, we entered into an amended and restated credit and guaranty agreement, or 2021 Revolving Facility, providing for revolving borrowings of up to $150.0 million with an availability period of five years. Under the 2021 Revolving Facility, we can use up to $20.0 million in letters of credit and up to $10.0 million in borrowings on same-day notice, referred to as swingline loans. Additional debt issuance costs of $0.8 million were allocated to the 2021 Revolving Facility.
The interest rate applicable to the 2021 Revolving Facility is, at our option, at a rate equal to the greatest of (i) the administrative agent’s prime rate (ii) the federal funds effective rate plus 1/2 of 1.0% or (iii) one month LIBOR (subject to a 1.00% floor), plus 1.00% or LIBOR (subject to a 0.00% floor) plus 2.00%. The interest rate margins under the 2021 Revolving Facility are subject to a reduction of 0.25% and a further reduction of 0.25% upon achieving total net first lien leverage ratios of 3.50 to 1.00 and 2.50 to 1.00, respectively. We are required to pay a commitment fee in respect of unutilized commitments under the 2021 Revolving Facility. The commitment fee is, initially, 0.35% per annum. The commitment fee is subject to a reduction of 0.10% if the total net first lien leverage ratio does not exceed 3.50 to 1.00. We are also required to pay customary letter of credit fees and agency fees. We have the option to voluntarily repay outstanding loans under the 2021 Revolving Facility at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans. There is no scheduled amortization under the 2021 Revolving Facility. Any principal amount outstanding is due and payable in full at maturity, five years from the closing date of the 2021 Revolving Facility. Obligations under the 2021 Revolving Facility are guaranteed by our existing and future direct and indirect material wholly-owned domestic subsidiaries, subject to certain exceptions.
The 2021 Revolving Facility contains a number of covenants that, among other things, subject to certain exceptions, restrict our ability and the ability of our restricted subsidiaries to incur additional indebtedness and guarantee indebtedness; create or incur liens; pay dividends and distributions or repurchase capital stock; merge, liquidate and make asset sales; change lines of business; change our fiscal year; incur restrictions on our subsidiaries’ ability to make distributions and create liens; modify our organizational documents; make investments, loans and advances; and enter into certain transactions with affiliates.
The 2021 Revolving Facility requires compliance with a total net first lien leverage ratio of 4.50 to 1.00, or Financial Covenant. The Financial Covenant will be tested at quarter-end only if the total principal amount of all revolving loans, swingline loans and drawn letters of credit that have not been reimbursed exceeds 35% of the total commitments under the 2021 Revolving Facility on the last day of such fiscal quarter.
At September 30, 2022, and December 31, 2021, we had no amounts outstanding under our 2021 Revolving Facility or any outstanding letters of credit and were in compliance with all financial covenants.
Note 7. Derivative Financial Instruments
Interest Rate Swaps
At June 30, 2021, we held interest rate swap contracts with an aggregate notional amount of $395.0 million, which were designated as cash flow hedges. In July